Is Western Union Looking For Love in All the Wrong Places?

With shares of The Western Union Company (NYSE:WU) trading at around $14.15, is WU an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Western Union just took a big hit in Mexico, but that should have come as no surprise as Mexico is more like a war zone than a normal functioning economy at the moment. It’s estimated that drug cartels have infiltrated 78 percent of businesses for a cut. Even if a business in Mexico isn’t a victim, the threat is always there. It might seem as though Western Union is even a bit masochistic, considering it has now taken an increased interest in Europe.

Western Union is opening new offices in Vienna and Frankfurt in an effort to target SMEs – Small and Medium Enterprises. The reason for this move is that there are over 2 million SMEs in Germany and Austria. If Western Union can even make a dent on this market by offering more convenience for payment transactions, then the potential is good. However, Europe is extremely weak at the moment. Demand in every business is poor, and people as well as businesses are hoarding their money. If there is any way to work around adding an extra expense, it will be found, at least in most cases.

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Western Union appears to know what it’s doing, as revenue and earnings have improved over the past three years. On the other hand, growth expectations were just lowered, and there is a relatively quiet yet very dangerous threat emerging, which goes by the name of PayPal. As you might already know, PayPal is a segment of eBay Inc. (NASDAQ:EBAY). Therefore, you have to consider whether you would put your money on Western Union’s management team or eBay’s management team. Any prudent investor would look at past results for both companies and conclude that eBay is the safer bet.

Let’s take a look at some important numbers for Western Union before forming an opinion…

E = Equity to Debt Ratio Is High

The debt-to-equity ratio for Western Union is too high. The balance sheet is in negative territory, but it’s manageable. Operating cash flow is strong at $1.15 billion.   

Debt-To-Equity

Cash

Long-Term Debt

WU

2.99

$1.43 Billion

$3.43 Billion

MGI

N/A

$3.14 Billion

$810.11 Million

EEFT

0.46

$284.92 Million

$259.72 Million

 

T = Technicals on the Stock Chart Are Mixed  

Western Union and Moneygram International (NYSE:MGI) have both underperformed the market over the past three years. Euronet Worldwide has displayed a much stronger performance over that time frame. However, Western Union yields 3.70 percent whereas the two competitors listed here don’t offer any yield.

1 Month

Year-To-Date

1 Year

3 Year

WU

5.08%

3.31%

-24.64%

-19.62%

MGI

9.03%

5.34%

-25.01%

-41.67%

EEFT

5.67%

4.24%

31.41%

20.47%

 

At $14.15, Western Union is trading above its 50-day SMA, and below its 100-day and 200-day SMA.   

50-Day SMA

13.26

100-Day SMA

15.17

200-Day SMA

16.17

 

E = Earnings Have Been Steady     

When it comes to annual revenue and earnings, Western Union hasn’t knocked the ball out of the park, but there has been consistency.

2007

2008

2009

2010

2011

Revenue ($)in billions

4.90

5.28

5.08

5.19

5.49

Diluted EPS ($)

1.11

1.24

1.21

1.36

1.84

 

When we look at the last quarter on a year-over-year basis, we see a slight increase in revenue and moderate increase in earnings.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in billions

1.41

1.43

1.39

1.43

1.42

Diluted EPS ($)

0.38

0.73

0.40

0.44

0.45

 

T = Trends Support the Industry, But Not the Company  

With the advent of smartphones and tablets, it will be even easier than before for people to send money because they will have the option of sending money while on the go. This is important because it will make PayPal more accessible. Western Union is currently the leader in the industry, but if trends continue with their current directions, PayPal will eventually become the dominant player.

Conclusion

On the positive side, Western Union has solid margins, good cash flow, consistent growth, a growing online business, and a healthy yield. Furthermore, the Trailing P/E is 6.96 and the Forward P/E is 9.56. However, the negatives outweigh the positives due to impact, and they include exposure in a weak market, increased future competition, and lowered growth expectations.

Western Union is a STAY AWAY.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.